The Federal Inland Revenue
Service (“FIRS”) with the approval of the Federal Minister of Finance, have
published the gazetted version of the Income Tax (Transfer Pricing) Regulations
2018 (“TP Regulations 2018”).

Also published by FIRS are
the Guidelines on Transfer Pricing Regulations and a Public Notice on amongst
other things, the set date for the enforcement of the TP Regulations 2018
Administrative Penalties for non-compliance with the TP Regulations 2018.

The TP Regulations 2018 has
therefore now replaced the Income Tax (Transfer Pricing) Regulations 2012. One
of the key objectives of the TP Regulations 2018 is to provide a legal
framework for the implementation of Transfer Pricing Regulations. This key objective
is expected to ultimately reduce tax evasion; and tax evasion commonly occurs
through the under-pricing or the over-pricing of transactions between related
or connected parties who infringe the arm’s length principle when undertaking
their transactions

Other key objectives of the
TP Regulations 2018 include the reduction of double taxation and the provision
of a level playing field for both national and multi-national enterprises.

The commencement date for the
TP Regulations 2018 is retrospectively 12th March 2018; though FIRS has by a
October 2018 Public Notice extended the compliance commencement start date for
the administrative penalties for non-compliance with the TP Regulations 2018 to
now be 31st December 2018.

Arm’s Length Principle

The TP Regulations 2018
treats a company’s Head or parent office as a separate and connected entity to
its subsidiary Permanent Establishment office or entity (“PE”), with regard to
any commercial transaction undertaken between the parent/head office and its subsidiary
office, being treated as controlled transactions that must comply with the TP
Regulations 2018.

Persons are also deemed
connected where one of them has the ability to control or influence another or
other connected persons in making financial, commercial or operational
decisions.

The Arm’s Length Tax
Principle simply requires that the conditions of a controlled transaction,
between connected persons, whether resident or non-resident, must not differ
from the conditions that would have applied where the connected persons are
separate, independent and neutral parties, undertaking comparable transactions
under comparable circumstances.

Where connected persons fail
to adhere to the Arm’s Length Principle in their transactions, FIRS is
permitted to make necessary tax adjustments to ensure that the appropriate
taxable profits from the connected transactions are collected,

Transfer Pricing Methods

In determining whether a
transaction or a series of transactions are consistent with the arm’s length
principle, one of the following Transfer Pricing methods will be applied:-

The Comparable Uncontrolled Price (“UP”) Method

The Resale Price Method

The Costs Plus Method

The Transactional Net Margin Method

The Transactional Profit Split Method

Any other method which FIRS may prescribe.

The preferred TP method to be
adopted will depend on various factors including the strength or weakness of
such a TP method considered; the appropriateness of such a method; the
availability of reliable TP data or information and the degree of comparability
between the controlled transaction and uncontrolled transactions.

Advance Pricing Agreements

A connected person can, as an
efficient tax strategic plan, approach FIRS to execute a Advance Pricing
Agreement (“APA”) which Agreement will provide some set criteria and certainty
for determining the connected person’s future transfer pricing compliance
obligations. The duration of a first APA must not however exceed three (3)
years.

All APAs must adhere to the
provisions of the TP Regulations 2018.

Mandatory TP Declaration

All connected persons are now
required to, within six (6) months of the end of their accounting year, declare
any relationship that they might have with any other person or persons, whether
or not the connected persons are resident or non-resident.

Failure to file a TP
Declaration within the timeframe required attracts an Administrative penalty of
Ten Million Naira (N10,000,000). A further administrative penalty of N10,000
(Ten Thousand Naira) for every day that the filing default occurs, will also be
applied.

Failure to file TP
Declarations for occurrences like mergers, acquisitions, sale or such other
corporate structural changes attracts an administrative penalty of N25,000
(Twenty-Five Thousand Naira) for each day that such filing default persists.

Mandatory TP Disclosures

Connected persons are also
now required to, with or without notice from FIRS, file Disclosures of all
their controlled transactions not later than six (6) months after the end of
each of their accounting year or eighteen (18) months after their incorporation,
whichever of the latter two is earlier.

The administrative penalty
for failing to file a Mandatory Disclosure with FIRS or for filing such
disclosure with inaccurate information is the higher of either Ten Million
Naira (N10,000,000) or One per cent (1%) of the value of the controlled
transaction that was not disclosed; or where disclosed, was incorrectly
disclosed. A further administrative penalty of Ten Thousand Naira (N10,000) for
everyday that these breaches persist will also be applied.

Mandatory TP Documentation

Connected persons are also
now required to keep a record of sufficient data or information, with an
analysis of such retained data and information, which verifies the pricing of
connected transactions as being consistent with the arm’s length principle.
This requirement also applies where the connected person undertakes a
transaction through a related party with a third person.

All transaction data and
records relating to any trade carried on between connected persons are required
to be preserved and retained for a period of six (6) years from the date on
which any filing return relevant to the last transaction entry was required to
be made.

The same administrative
penalties that apply to defaults in filing Declarations and Disclosures also
apply to failures to file the required Transfer Pricing Documentation with
FIRS.

Where FIRS request for any TP
information and such information, including contemporaneous documentation, are
not furnished within the time specified in any FIRS Notice, with no extension
of time granted subsequently, additional administrative penalties will apply.
The first administrative penalty is a sum equal to one per cent (1%) of the
value of the controlled transaction to which such information relates. The
second administrative penalty is the sum of Ten Thousand Naira (N10,000) for
each day that the default persists.

General TP Guidelines

By an Information Circular
dated 20th September 2018, FIRS published its Guidelines regarding TP
Documentation. A key provision in this Guideline is the advice to Taxpayers not
to engage or procure the services of any person who is currently employed by,
or who was formerly employed by FIRS to develop, record, correct or submit any
TP Documentation on the Tax Payers behalf. This is especially as the latter
constitute a conflict of interest malpractice.

Connected Persons are also
required to prepare and submit to FIRS their annual Country-by-Country reports
not later than twelve (12) months after the end of the connected person’s end
of accounting year.

Another new provision in
these Guidelines and in the TP Regulations 2018 is FIRS undertaking to keep
confidential all information and records disclosed in all TP Documentation
filings.

TP Dispute Resolution

FIRS is required by the TP
Regulations 2018 to establish a Decision Review Panel (“TP Review Panel”) to
administratively resolve any dispute or controversy that arises from the
application of any of the provisions of the TP Regulations 2018.

Any objection to a TP tax
assessment is required to be filed within thirty (30) days of the taxpayer’s
receipt of such a tax assessment. The decision of the TP Review Panel is deemed
to represent the final decision of FIRS without encumbering the taxpayer’s
right to further appeal against such a decision to a judicial body.

Conclusion

It will be very interesting
to review some data on the efficacy of the old Income Tax (Transfer Pricing)
Regulations 2012. Lessons learned from such data will be very helpful in the
implementation of the TP Regulations 2018.

Generally, the lack of
reliable and verifiable transactional data, with their efficient analysis
remains a handicap to an effective tax administration, which includes Transfer
Pricing Arm’s Length Comparability Transactions.

Application of reciprocal
International Tax Treaties on Transfer Pricing application will only yield the
desired results if adequate manpower capacity and funding to aid tax
enforcement machinery are made available.

The neutrality and
independence of the TP Review Panel, under a very aggressive tax regime, is
doubtful if the Review Panel does not adopt Mediation methods, as opposed to
the traditional more aggressive adversarial hostile methods, in resolving tax
disputes.

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counseling to their specific factual situation.

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